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Taxpayer's Tab: What Would Free Tuition Cost Taxpayers?

This week’s edition of The Taxpayer’s Tab features legislation that would eliminate the cost of tuition at public universities. And, although we did not score any bills in the past week that would specify savings, we did note a pair of proposals that would offer bonuses to federal employees that find ways to reduce wasteful spending. Be sure to follow NTU Foundation on Twitter (@NTUF) for more of the latest research from our BillTally project!

Most Expensive

President Obama made a policy splash in January with a proposal to offer “free” tuition at community colleges. The plan – which would come with a $60 billion price tag over the next ten years – has failed to gain much traction in Congress. Senator Bernie Sanders (I-VT) has introduced new legislation that ups the ante on the President’s proposal by offering taxpayer-subsidized tuition at all public colleges and universities, expanding federal work-study programs, and allowing refinancing of certain federally-issued student loans.

Net Change in Spending(Numbers in Billions of $)

Program Name

Current Funding Level or New Spending?

FY1

FY2

FY3

FY4

FY5

Total

Public College Tuition Grants

New

$47.0

suchsums

suchsums

suchsums

suchsums

$47.0

Student Loan Refinancing

New*

$62.9

$62.9

Federal Work-Study Programs

$0.99

($0.02)

$0.51

$1.01

$1.51

$2.01

$5.02

Total

$109.88

$0.51

$1.01

$1.51

$2.01

$114.92

*note: Figures based on a CBO estimate for a related proposal included in S. 2432 (113th Congress), the Bank on Students Emergency Loan Refinancing Act. The College for All Act would likely entail higher costs to the federal government, because while it excludes certain private loans from refinancing options, it would set interest rates for qualifying refinanced loans according to rates for Treasury 91-day notes which would likely result in lower levels than those in S. 2432.

Title I of the legislation establishes a new grant program for public higher education institutions. According to Senator Sanders’ office, tuition at American public universities is about $70 billion per year. S. 1373 would authorize the federal government to provide $47 billion in fiscal year 2016 to state governments in order to cover 2/3 of that cost. In exchange, state governments would be responsible for making investments in higher education that reduce reliance on low-paid adjunct faculty, improve academic instruction, and improve the availability of need-based financial aid. The legislation specifies the funding level for only the first year. Subsequent years are authorized “such sums as may be necessary.”

Title II of the bill addresses student loans. Student loans now account for more debt than credit cards and cars, with 40 million borrowers across America owing about $1.2 trillion. The demand for higher education continues to grow as employers prioritize degrees and the government incentivizes their pursuit, which means the cost to attend college is unlikely to decrease any time soon. Taxpayers continue to subsidize billions of dollars in loans to students who may not be able to pay them back as they graduate into a weak job market, creating concern among some economists that student loan debt may be the next “bubble” to burst and severely impact financial markets at home and abroad.

The bill would cap interest rates for student loans at 8.25 percent, and enables those who borrowed at higher rates to refinance their loans at lower current ones (as in Senator Warren’s proposal, which the Congressional Budget Office determined would cost $60.9 billion in the first year). Senator Sanders’ legislation differs from Senator Warren’s in that it would tie all future student loan interest rates (those issued after July 1, 2015) to the bond equivalent rate of 91-day Treasury bills. Doing so would likely result in even lower interest rates than those that would be realized in Sen. Warren’s proposal and thus higher costs to the federal government.

Title III of the bill increases spending for the Federal Work-Study (FWS) program. FWS subsidizes part-time work programs for undergraduate and graduate students who can demonstrate financial need. It was last authorized in 2009 for “such sums as may be necessary.” In FY 2015 FWS received $992 million in appropriations. Sanders’ bill wouldset specific authorization for the next five years, starting at $975 million in FY 2016 and increasing to $3 billion by FY 2020. The table above shows the net change that would occur under this bill compared to current funding levels.

Free tuition isn’t cheap. All told, Senator Sanders’ sweeping legislation would increase federal spending by at least $109.9 billion in the first year alone. While the proposal should theoretically reduce demand for student aid programs such as Pell Grants and federally-backed student loans, there are no spending reductions in the legislation.

To pay for the new spending, the College for All Act would enact a new “Inclusive Prosperity” tax on certain financial transactions. Also introduced as stand-alone legislation in S. 1371 (also by Senator Sanders with one cosponsor), and H.R. 1464 (introduced by Rep. Keith Ellison (D-MN) with 26 cosponsors), transactions would be taxed at a rate of 0.5 percent (stocks), 0.1 percent (bonds), or 0.005 percent (derivatives).

Unlike a related yet more comprehensive transaction tax proposal (with a slightly lower rate) that would also repeal the existing income, corporate, and payroll taxes, the “Inclusive Prosperity” tax would be in addition to existing rates. Supporters of the tax, also known as the Robin Hood Tax, claim it would raise up to $300 billion per year. France and Italy each saw a drop in trade volume after enacting a similar tax. It is unclear if this was factored into the estimate for the proposal here in the U.S.

“We live in a highly competitive global economy. If our economy is to be strong, we need the best educated work force in the world. That will not happen if every year hundreds of thousands of bright young people cannot afford to go to college and if millions more leave school deeply in debt,” Sanders said in a statement.

The Bottom Line: The College for All Act would authorize federal grants to provide states with funding to reduce or eliminate the cost of public college tuition. S. 1373 also allows student loan borrowers to refinance their loans at lower interest rates and institutes a new tax on financial transactions to offset the costs. It would increase federal spending by over $109 billion in the first year.

Wildcard

As of today, the national debt stands at over $18.1 trillion, or nearly $156,561 per American household. Meanwhile, Congress continues to introduce legislation that would increase rather than cut federal spending even as the Congressional Budget Office (CBO) warns of the “serious negative consequences” that a high national debt might bring, including ballooning interest payments, lower economic productivity, and a greater risk of financial crises. In fact, within the next decade CBO projects the debt-to-GDP ratio to reach a level twice as high as that in 2007 and higher than at any point since 1950.

Although a multi-trillion dollar debt will almost certainly take decades to pay down, many economists and government watchdogs have pointed out that there are plenty of small opportunities to cut waste within existing government programs that could add up to significant savings for taxpayers in the shorter term. NTU Foundation’s sister organization, the National Taxpayers Union, co-authored a report with the U.S. Public Interest Research Group (USPIRG) in 2013 that identified over $500 billion in bipartisan savings initiatives. And every year, the Government Accountability Office publishes a report on duplicative and overlapping federal programs that could be eliminated or scaled back to substantially reduce spending and administrative burdens.

It is in that spirit that Senators Rand Paul (R-KY) and Mark Warner (D-VA) introduced the Bonuses for Cost Cutters Act, which would authorize the federal government to award bonuses to employees that identify opportunities to eliminate wasteful or unnecessary spending. Ninety percent of the savings identified would be deposited in the general fund of the Treasury, and agency heads would keep the rest to use towards the bonuses (which are capped at $10,000). Rep. Charles Fleischmann (R-TN) introduced similar legislation in the House, which he dubbed the Employees of America Streamlining for Your (EASY) Savings Act of 2015.

In a statement, Senator Paul said “The Bonuses for Cost-Cutters Act will reduce the federal deficit and reverse the trend toward agency bloat, by combating inefficiency and mismanagement of funds in the government.” The total savings that might result from the bill’s provisions are uncertain.

The Bottom Line: S. 1378 and H.R. 2532 would authorize the heads of federal agencies to award bonuses to employees that identify opportunities to reduce wasteful or unnecessary spending within their departments.

National Taxpayers Union Foundation is a nonpartisan research and educational organization dedicated to helping Americans of all ages understand how taxes, government spending, and regulations affect them. Through our timely information, analysis, and commentary, we’re empowering citizens to engage in important policy debates and hold officials accountable.

Our findings are provided for educational purposes only and are not intended to aid or hinder the passage of legislation or as a comment on any Member’s or Candidate's fitness to serve.

NTU Foundation

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Founded in 1973, National Taxpayers Union Foundation (NTUF) is a non-partisan research and educational organization dedicated to showing Americans how taxes, government spending, and regulations affect them. Through difference-making data, analysis, and commentary, we empower citizens to engage in the critical policy debates of our time – and hold elected officials accountable.